China Can’t Carry Global Economy if U.S. Stumbles

My Comments: Last Thursday and Friday I re-posted two articles about the US and China. This is related to those two.

We as a nation have about $20T (that’s TRILLION) of debt. Sooner or later, we have to pay it back, and #45 has promised huge infrastructure and defense spending increases. Either we grow our way out of it (creating more debt to get started), cut a piece out of everything we now spend money on, or change our tax structure. My opinion is it’s going to have to be all three.

Donald Trump has expressed an interest in tax reform. At least I think he has; I’m not sure anymore what he has in mind, if anything. But if the repeal of ObamaCare is any indication, that effort, as much as anything, gave tax cuts to those who are already rich. Trickle down economics has been shown to not work and is a false mantra. If he thought health care was complicated, he hasn’t seen anything yet when he starts to tackle tax reform.

So how do we keep everything on track if the US economy stumbles? A growing middle class following World War II gave rise to our strength as a global economic power. But that middle class is disappearing and with it will go our role as a financial power on the global scale. It’s the middle class that buys stuff like houses and cars and all the goodies America is famous for. Nothing I’ve seen or heard from the Trump camp is directed towards revitalizing America’s middle class.
By Nathaniel Taplin on March 31, 2017

Suddenly it’s a world upside down–investors are deserting U.S. growth plays as skepticism about Donald Trump’s agenda rises, while overcapacity-ridden China and aging Japan are looking unexpectedly strong.

Better growth in the world’s second- and third-largest economies, which both posted surprisingly good manufacturing numbers Friday, is great news for Asia and commodity exporters.

It won’t do much to help major developed economies, however, if growth in America and Europe falters along with Mr. Trump’s pro-business agenda.
Better growth in China does contribute in one key way to the so-called Trump trade: It boosts global inflation through higher commodity prices. The close correlation between global commodities and Chinese real-estate investment shows the bulk of the big bounce in prices since early 2016 is due to the cyclical recovery in China, rather than the rhetoric around plans for increased U.S. infrastructure spending.

That means that a big part of the uptick in global inflation numbers –which central banks from Europe to the U.S. have worriedly noted has mostly been driven by fuel prices rather than rising wages–is about China as well.

Unfortunately that is the wrong sort of inflation: Rising commodity prices in consumer countries such as the U.S. and nations in Europe erodes purchasing power and ultimately means lower growth. Strong growth in Chinese construction, meanwhile, is an enormous help for Australian iron-ore exporters and copper miners in Chile, but it doesn’t do much for the U.S. or Europe–the likes of heavy equipment maker Caterpillar(CAT) aside.

Faster growth in China and Japan will doubtlessly help certain firms and sectors on the margins–but these are still highly protected economies, unlike the U.S. and European powerhouses such as Germany and the U.K.

The primary effect of better growth in China’s “old” economy is still higher commodity-price driven inflation –reflation indeed, but not of the happy variety. With Mr. Trump’s agenda under assault and political uncertainty in Europe still rising, the West needs to look to itself to keep growth ratcheting higher.